When it comes to the sale of investment funds, insurance regulators in Canada have decided to go their own way from their counterparts in securities. While the latter banned upfront commissions in 2021, insurance regulators chose, in May 2023, not to do so, except for the sale of funds with deferred acquisition fees. However, they felt that the sale of segregated funds and the payment of commissions should be tightly regulated.
This was the message delivered by Louise Gauthier, Senior Director of Distribution Oversight Policy at the Autorité des marchés financiers, to a gathering of general agent executives and insurers on December 7. The meeting had been convened by Canadian Association of Independent Life Brokerage Agencies (CAILBA) at UV Insurance’s offices, in Drummondville.
In securities, upfront commissions were eliminated by Regulation 81-105 in June 2021. Manufacturers were then prohibited from paying commissions to distributors. As a result, funds with deferred acquisition fees were banned. The Canadian Securities Administrators (CSA) considered that this commission structure generated conflict of interest between sellers and clients.
Commission charge-back
However, in the insurance industry, regulators were aware that there are differences in the sales processes. For example, insurers require the reimbursement of commissions paid to the advisor when the client cancels the sale of a policy within two years or, in the case of segregated funds, wants to recover its investment. This process is called commission charge-back. This process does not exist in securities.
In this matter of investment fund sales in Canada, the Autorité des marchés financiers has a different knowledge than other regulators in Canada because its mandate is already multidisciplinary. This allows it to cover both insurance and mutual funds as well as securities. In other provinces, when it comes to segregated funds, there is little regulation, whereas in Quebec, it is covered by the Act respecting the distribution of financial products and services, which encompasses all segments.
Therefore, the Autorité des marchés financiers decided to bring the discussion to the national level with insurance regulators, said Gauthier. From September to November 2022, a consultation was conducted by the Canadian Council of Insurance Regulators (CCIR) and the Canadian Regulatory Authorities for Insurance (OCRA).
A national standard
Nineteen comments were received, reported Gauthier, adding that the questions were specific. "We received substantial submissions that allowed us to make an informed diagnosis based on the information and data collected, as the commission recall remuneration model already existed," said Gauthier during the meeting.
Considering the results, insurance regulators decided in May 2023 that they would not ban upfront commissions in insurance, except for funds with deferred acquisition fees. As for the commission recall remuneration model, insurance regulators believe that it should be tightened because there is a potential for conflicts of interest.
Regulators are currently working on the development of a national standard for the oversight of segregated fund sales. It will include requirements for customer knowledge, product knowledge, suitability, and conflict of interest management. These requirements would be like what is found in securities.
In early 2024, insurance regulators should be able to complete an extensive first draft of a national standard. They will begin a pre-consultation, but the Autorité des marchés financiers wants to make it clear, as Gauthier pointed out, that it will not be to revise the major guidelines since they are already set. It will be more about assessing how to adapt them based on what is happening in practice. Subsequently, they will finalize guidelines that are expected to be released for public consultation towards the end of 2024, with implementation in 2025.
Once this national standard is in place, the Autorité des marchés financiers says it could add further control measures if it continues to find inequitable results for consumers.
